Russian economy hit by Ukraine turmoil

Originally published April 16, 2014 at 9:51 am

Updated April 16, 2014 at 12:01 pm

Russia's economy slowed sharply at the start of the year as the crisis in Ukraine spooked investors into pulling money out of the country. But with Russian President Vladimir Putin still enjoying high popularity ratings, the economic damage is not yet likely to soften his politics in the region, analysts say.

Russia’s economy slowed sharply at the start of the year as the crisis in Ukraine spooked investors into pulling money out of the country. But with Russian President Vladimir Putin still enjoying high popularity ratings, the economic damage is not yet likely to soften his politics in the region, analysts say.

In the first official estimate of the Ukrainian turmoil’s impact on growth, Economy Minister Alexei Ulyukayev said Wednesday the economy expanded just 0.8 percent in the first quarter from a year earlier — far short of the previous prediction of 2.5 percent. Compared with the previous quarter, the economy contracted 0.5 percent.

“The acute international situation of the past two months” and “serious capital flight” were to blame, Ulyukayev told parliament.

Russian markets have been rattled by the tensions with neighboring Ukraine, where Russia annexed the Black Sea region of Crimea last month. The main stock index tanked 10 percent in March, wiping out billions in market capitalization. In the first three months of 2014, the ruble lost 9 percent against the dollar, making imports more expensive, while spooked investors pulled about $70 billion out of the country — more than in all of 2013.

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Among investors’ chief concerns are that the U.S. and European Union might escalate their sanctions against Russia to affect trade, particularly in the valuable energy market. Europe is Russia’s largest trading partner. It buys more than three-quarters of Russia’s crude oil and natural gas exports, which fund about half the government budget.

So far, the U.S. and the EU sanctions have been limited to individual Russian politicians and businessmen close to the Kremlin. But the possibility of tougher sanctions has been enough to hinder investment, which dropped 4.8 percent in the first quarter, according to Ulyukayev.

And yet, experts say, Putin is unlikely to adopt a more conciliatory stance over Crimea or the rest of Ukraine, even if more sanctions were imposed.

“This will be the price that Putin will accept,” said Maria Lipman, an analyst with the Moscow Carnegie Center.

Part of the reason he can do so is that his popularity ratings are high, said Liza Ermolenko, an economist with Capital Economics in London. That could change if the economic downturn translates to increased hardship for Russians, but that would require a more protracted drop.

The Ukrainian crisis is coming at a bad time for the Russian economy, which faces fundamental problems, the World Bank said in March. The growth rate in 2013 was the lowest in 13 years after a slump in 2009 caused by the global financial crisis.

The World Bank predicted the economy could shrink by a dramatic 1.8 percent this year if instability over Ukraine continues and Russia is hit with more Western sanctions.

Tensions have only increased in April, as NATO accused Russia of amassing troops on its border for a possible invasion of Ukraine and the authorities in Kiev say Russia is backing armed militants in the country’s east, where pro-Russian activists have seized government buildings and police stations.